Stocks are trapped between 2 key levels, and Bank of America has identified how they can escape
- The US stock market is stuck in a narrow range after sprinting into the year 2018 and then plunging by more than 10%.
- Bank of America's chief investment strategist has pinpointed this range, as well as six things that would trigger a break above or below those levels.
After sprinting into the year 2018, the US stock market has hit a wall.
Monday would be the 69th trading day since the S&P 500 index closed at a record high. The Dow Jones industrial average has experienced the same drought, which is the longest since a 288-day streak that ended in July 2016.
Both indexes fell into a correction in February, re-injecting volatility into stocks after a long and peaceful stretch.
But since then, stocks have neither surged nor declined meaningfully, trading in a relatively narrow range.
For the S&P 500, strategists at Bank of America Merrill Lynch pinpointed this range to be between 2,550 and 2,850, and they have some ideas on what could push stocks past both levels. The benchmark index opened at 2,677.92 on Monday, and its all-time high, hit on January 26, is 2,872.87.
Michael Hartnett, the firm's chief investment strategist, wrote in a note on Monday that the good news is its Bull & Bear Indicator is in neutral territory. That means investors are no longer as euphoric on stocks and credit as they were earlier this year, just before equities fell into a correction.
"The bad news: April BofAML Fund Manager Survey made clear that few are bearishly positioned for lower growth, lower yields, and lower cyclicals," Hartnett said.
And so with the S&P 500 chugging along in a tight range, Hartnett identified three triggers that could push the S&P 500 below 2,550:
- Weaker GDP growth and earnings: Specifically, stocks could crack if Chinese exports decline, geopolitical concerns hurt US manufacturers, and capital spending with tax-cut savings fail to materialize.
- Credit contagion: The US dollar's rebound is causing pain in some emerging-market currencies. There's a risk that emerging market assets become more volatile and causes investors to deleverage.
- Policy impotence: The European Central Bank and Bank of Japan may not be successful at keeping volatility and high-yield spreads low even if they sound a dovish tone.
And as for what could send the S&P 500 beyond 2,850, Hartnett quips:
- US policymakers "blink": This would happen if the Federal Reserve reins in its dot plot that reflects expectations for interest rates, and the Trump administration is less protectionist on trade.
- Stock buybacks: Stock buybacks are expected to pick up as companies spend their tax windfall.
- Tech bubble: Investors could once again flock into the big tech stocks, or FAANGs.